Manufacturing is Struggling with Supply Chain Sshortages

By | November 1, 2021

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

U.S. stocks shook off early declines and closed out the last trading day of the month with modest gains on Friday as a rise in Microsoft helped offset declines in Amazon and Apple after disappointing earnings from the online retailer and iPhone maker. The Dow Jones Industrial Average rose 89.08 points, or 0.2% to 35,819.56, the S&P 500 rose 8.96 points, or 0.02% to 4,605.38 and the Nasdaq Composite rose 52.27, or 82.1% have exceeded expectations and the year-over-year points or 0.3% to 15,498.39. The Dow was up 0.4% for the week and 17% for the year. The S&P 500 gained 1.3% for the week and 22.6% for the year. The Nasdaq Composite gained 2.7% for the week and 20.3% for the year. With 279 companies in the S&P reported earnings above expectations, according to Refinitive data. The current year-over-year earnings growth rate for the third quarter is 39.2%. Investors have been closely attuned to the ability of companies to maneuver through labor shortages and clogs in the supply chain and a mixed economic picture with a Federal Reserve starting to reduce its massive bond purchases soon. The jury is still out on whether the Fed’s “transitory” view on inflation will hold true.

Economic data form last week was mixed as lingering supply chain issues, rising prices and still strong consumer spending continue to make its way into the data. The week started on a positive note, as new home sales rose 14% to 800,000 units annualized rates and an increase of 7% in existing home sales the week preceding. This seems to suggest that a rebound in housing activity may be underway after signs of slowing in the summer after a year of strong activity. Lack of labor and soaring prices are limiting housing activity. The increase in price is squeezing first-time and lower income consumers out of the market. Completed homes rose to a six-month high, suggesting that builders are making progress on labor and building supply shortages and price growth is slowing. While activity has picked up modestly, there could be headwinds ahead as mortgage rates are starting to rise.

Real GDP increased at an annual rate of 2.0% in the third quarter, following a second quarter advance of 6.7%. The report showed that the economy slowed more than expectations as consumption was dampened by the ending of most stimulus efforts in the second quarter. Also, the impact of renewed infections from the Delta variant and the impact of supply chain shortages on both demand and production. Real consumption edged up only 1.6%, while fixed investment slipped 0.8%. Residential investment, federal government spending and trade were all drags. Nonresidential fixed investment and state and local government spending were positive. Inventories added 2.1 percentage points to growth. Final sales were flat. Without that contribution from inventories, the third quarter would have been flat. Looking forward, economic growth will rebound, albeit not to the pace seen earlier this year that contributed to the ungluing of the supply chains. The need to restock shelves and continued consumer resilience will underpin growth. Untangling the supply chains will take some time. Inflation hit a 31-year high in the third quarter but is likely to slow next year. The Fed hopes it will slow to the 2% target, but also may prove to be more resistant than the Fed’s projections and may require tightening actions.

The 1% decrease in personal income was expected, as the federal government unemployment benefit ended in early September. Spending has remained firm, although slowing from its stimulus fueled totals early in the year. Personal consumption rose 0.6% in September, following a gain of 1.0% in August. Spending is shifting to services but some of the weakness can be referred to the future, as in the case of autos. When auto production does take off, the consumer spending on autos is likely to pick up. Some off the September increase in spending can be traced to price. The PCE deflator rose 0.3% in both September and August and a 0.4% increase in July. Excluding food and energy, the core PCE deflator rose 0.2%, a slower pace than the 0.3% advance recorded in July.

Manufacturing is still struggling with supply chain shortages and the 3.2% annualized dip in real equipment spending in the third quarter can be attributed to holdups in production. New orders for manufactured goods decreased 0.4%, following four monthly increases, including a 1.3% advance in August. Excluding transportation, orders increased 0.4%. Transportation orders, down two out of the last three months, fell 2.3% in September. Core capital goods orders advanced 0.8% in September. Over 70 container ships are idling outside of Long Beach and Los Angeles and that number has not changed much in recent weeks. Backlogs of core capital goods orders total $235 billion, a new record. Supply deliveries continue to slow and transportation has become arduous and expensive.

This week, we get a look at the ISM manufacturing and services indexes, factory orders, construction spending, auto sales and payroll employment.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index registered -0.13 in September, down from 0.05 in August. One of the four broad categories of indicators used to construct the index made a negative contribution and one category fell from August. The 3-month moving average moved down to 0.25 in September from 0.38 in August. The production related indicators contributed -0.37 to the CFNAI in September, down from -0.08 in August. Employment indicators contributed 0.16 to the CFNAI in September, up from 0.09 in August. The sales, orders and housing category contributed 0.07 in September, up from 0.01 in August. The personal consumption and housing category moved up to 0.07 in September, up from 0.01 in August. The report suggest that the economy was growing below potential in September.

New orders for manufactured goods decreased 0.4%, following four monthly increases, including a 1.3% advance in August. Excluding transportation, orders increased 0.4%. Transportation orders, down two out of the last three months, fell 2.3% in September. Core capital goods orders advanced 0.8% in September. Shipments of durable goods increased 0.4% in September, following a 0.5% decrease in August. Machinery shipments, up 11 out of the last twelve months, increased 1.7%. Unfilled orders, up eight consecutive months, increased 0.7% in September. Inventories advanced 0.9% in September, the eighth consecutive increase. Demand for durable goods has been strong driven by both consumers and businesses. New orders for consumer durable goods increased 23.4% year-on-year in September and shipments are up 13.6%. In addition to depleted business and retail inventories, strong personal demand has strengthened demand for durable goods. However, supply chain bottlenecks are delaying production and delaying some shipments. In addition, a energy shortage is hitting China’s manufacturing base and diesel is being rationed in some of China’s provinces. It will take some time to straighten the supply chain problem out.

New home sales came in better than expected in September, but rising mortgage rates will test the market the next few months. New-home sales were up 14% to 800,000 annualized units. Sales in September were revised lower to 702,000 from 740,000. Sales rose in the Northeast, South and West, but were little changed in the Midwest. Total months supply declined from 6.5 in August to 5.7, the lowest since May. The median sales price of new homes sold was $408,800, a new record high. Wood prices have started to increase again, having bounced from an August bottom of $400 per thousand board feet to the mid-$600s. The rising costs and increasing mortgage rates could be a headwind in coming months.

Personal income decreased by a sharper-then-expected 1% m/m in September, but the drop was largely driven by the drop in unemployment insurance claims. The cutoff of the $300 federal benefit for unemployment insurance was September 6, so the decline reflected support in states that did not end the policy early. Most categories expanded in September, including wage and salary income. Consumer spending has remained relatively little changed since March, as fading stimulus, supply constraints and increased infections have taken a toll. Personal consumption rose 0.6% in September, following a gain of 1.0% in August and a rise of 0.1% in July. Some off the increase in spending can be traced to price. The PCE deflator rose 0.3% in both September and August and a 0.4% increase in July. Excluding food and energy, the core PCE deflator rose 0.2%, a slower pace than the 0.3% advance recorded in July.

Important Data Releases This Week

The October ISM manufacturing report will be released on Monday, November 1 at 10:00 AM. In normal times, ISM reading in the 60+ range suggest a blistering pace. However, some of the recent readings have been propped up by slower deliveries, which in normal times are a sign of increased production but in this era is a sign of increased supply bottlenecks. We project the ISM manufacturing index will fall to 60.3 from 61.1. In addition to supplier deliveries, watch inventories backlogs price paid and employment as signs that the supply chain problems are stabilizing, or starting to come under control.

The September construction spending report will be released on Monday, November 1 at 10:00 AM. Construction spending was unchanged in August. For most of the year, strength in the residential sector covered weakness in the nonresidential side. However, residential construction took a small break in the summer months but appears to be making a small rebound. Also, high oil prices may be waking up domestic oil production. Look for construction spending to rise 0.2% for September.

The October ISM services index will be released on Wednesday, Nov. 3 at 10:00 AM. The services index came in at 61.9 in September and was noted by a still slowing rate of supply deliveries. We look for the index to slow to 60.4.

The September factory orders report will be released on Wednesday, Nov. 3 at 10:00 AM. Durable goods orders fell 0.4% in September as civilian aircraft orders weakened. Excluding that sector, orders did rise 0.4%. Demand is strong, but supply chain constraints are limiting production. Factory orders are projected to fall 0.2% for September.

The October payrolls report will be released on Friday, November 5 at 8:30 AM. September’s payroll report illustrated that a supply of workers is limiting the labor market’s recovery. Payrolls increased by only 194,000 in September, limited by 161K loss in in public education after seasonal adjustment. That seasonal factor will not be so evident in October. The extra federal unemployment benefit ended in September. That action, plus lower COVID infections should boost employment by 400,000 for October.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.